Trust Conversion Ruled Not Self‐Dealing Because Siblings Are Not Disqualified Persons

• Published date: 01 October 2017
• DOI: http://doi.org/10.1002/npc.30378
• Date: 01 October 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

5

October 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

argued that it is excluded from the exemption because it is

a nonreligious “ethical group” rather than a church.

The appellate court disagreed, first holding that Real

Alternatives is not “similarly situated” to a religious

employer. It does not, the court stated, resemble a reli-

gious entity in every way except belief in a deity. Real

Alternatives, the court wrote, is a “completely different

type of entity, particularly because of its structure, aim,

purpose, and function in its members’ lives.” It is a

“secular antiabortion . . . single-interest group.”

The court of appeals rejected the contrary conclusion of

the US District Court for the District of Columbia (March for

Life v. Burwell (summarized in the November 2015 is sue)).

It agreed with the lower court in this case, which stated

that Real Alternatives does not provide a “belief system”

and its “single mission statement cannot guide believers

comprehensively throughout life as a religion can.” This

observation reflects a US Supreme Court opinion accom-

modating a secular pacifist’s objections to the military

draft because his beliefs “occup[y] the same place in his

life as the belief in a traditional deity holds in the lives of”

adherents to religion (United States v. Seeger (1965)).

The court, not content with conventional equal pro-

tection analysis, ruled that, even if Real Alternatives was

deemed similarly situated to a religion, its challenge would

nonetheless fail because of the historic principle of “respect

for the autonomy of genuine religions.” This principle, the

court stated, “provides the legitimate purpose for the pref-

erential treatment of religious organizations.” The court

observed that the “attribute Congress selected for clas-

sification [for qualification for the mandate’s exemption] is

not opposition to contraceptives; it is its status as a house

of worship and [is] based on the long-established govern-

mental desire to respect the autonomy of houses of wor-

ship regardless of their particular stance on contraceptives.”

The court continued: “It is beyond dispute that respect-

ing church autonomy is a legitimate purpose—one that

not only satisfies rational basis review [the legal standard

applied in this case] but also is enshrined in the constitu-

tional fabric of this country.” Principles of noninterference

were said to trace back to the “text of the First Amendment

itself, which gives special solicitude to the rights of religious

organizations” and recognizes their “independence from

secular control or manipulation—in short, [their] power to

decide for themselves, free from state interference, mat-

ters of church government as well as those of faith and

doctrine” (Hosanna-Tabor Evangelical Lutheran Church

and School v. Equal Employment Opportunity Commission

(summarized in the March 2012 issue)). Accommodations

of this nature may be extended to houses of worship

and religious denominations without applying them to all

nonprofit organizations in order to “alleviate significant

governmental interference with the ability of religious orga-

nizations to define and carry out their religious missions”

(Corporation of the Presiding Bishop of the Church of Jesus

Christ of Latter-Day Saints v. Amos (1987)).

On this point, the court of appeals concluded: “Find-

ing all single-issue non-profit organizations to be similarly

situated to houses of worship based on their adherence

to a shared position on one issue would expand religious

exemptions beyond what is constitutionally required.”

The court also considered a claim by employees of

Real Alternatives that maintenance of a health insurance

plan that covers contraceptives through their employer

violates their religious rights under the Religious Freedom

Restoration Act. It held that any burden on the exercise of

religion in this case is not substantial, as the law requires.

It stated: “The fact that the Government may require

insurers to offer coverage for expenditures for certain

services that some might find objectionable on religious

grounds cannot form the basis of requiring the Govern-

ment to adjust its programs on behalf of all employees.”

The RFRA does not, the court wrote, protect against bur-

dens that are “utterly disconnected from the claimants

themselves.” The court refused to put an “active gloss”

on what is “essentially a passive commercial monetary

decision: enrolling in a plan so as to be reimbursed for ser-

vices of which one later chooses to avail him or herself.”

[10.1(a)(iii), 10.3(c), in forthcoming supplement] ◆

TRUST CONVERSION

RULED NOT SELF-DEALING

BECAUSE SIBLINGS ARE NOT

DISQUALIFIED PERSONS

The IRS ruled that conversion of a trust from non-

grantor to grantor status will not entail an act of self-

dealing because the parties involved, being siblings,

are not disqualified persons (Priv. Ltr. Ruls. 201730012,

201730017, 201730018).

Facts

An individual, as settlor and initial trustee, created

a trust. The trust agreement provides that, until an

anniversary of the initial contribution date, an amount

equal to an annuity amount will be annually distributed

to a charitable organization. The trust has been allowed

charitable contribution deductions (IRC § 642(c)(1)) for

the annual annuity amounts paid.

This trust is about to be amended, permitting another

individual—the “substitutor”—to have the power to

acquire or reacquire trust principal by substituting other

property of an equivalent value. The substitutor is not

a trustee of the trust. The grantor of the trust and the

substitutor are siblings.

Law and Analysis

This trust is a nonexempt split-interest trust that is

treated as a private foundation (IRC § 4947(a)(2)) for